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How Alibaba earns a profit by providing a free B2B e-commerce service

June 22, 2015 03:29 PM

For small and midsized Chinese companies, exporting is a daunting task, even after they receive an order from an overseas buyer. They often face obstacles in raising money quickly and at reasonable rates so that they can purchase a lot of materials they need to produce the order. They also must find an affordable and reliable shipping company, monitor shipments and file the proper documents for customs clearance.

To address these needs, Chinese e-commerce giant Alibaba Group has created an online service called OneTouch. Not only is the service free, Alibaba even promises to give 0.03 yuan ($0.005) cash back to its clients for every U.S. dollar worth of products they export.

Shenzhen Changsheng Electronics Co., Ltd. is one of the 20,000 Chinese companies that Alibaba says have worked with OneTouch. “We got an order recently but we almost gave it up. We asked the buyer to pay 100% up front, but the buyer only wanted to pay 30%,” says general manager Cheng Neng. “OneTouch helped us borrow money at low cost because we have a good record with Alibaba. That allowed us to take the order.”

Alibaba says OneTouch is the fastest-growing unit in its B2B division and ranks No. 3 among export companies in terms of funds raised from banks. About eight workers from the Bank of China, one of the five big state-owned banks in China, work on site to process One Pass loans, and the transactions they handle equals the value of transactions of 80 typical Bank of China branches, according to Alibaba.

By consolidating resources of shipping companies as well as financing services, OneTouch earns a profit while providing its service for free to exporting companies. It makes its profit by marking up the loans it provides to OneTouch clients. Alibaba’s size lets it deal with big banks that are reluctant to lend to small companies, and Alibaba’s records of how many Chinese companies have conducted business on its e-commerce sites allows it to gauge the risk of the loans.

Even with the markup, the interest rate OneTouch clients get is lower than they could get on their own, Alibaba says.

“Our goal is to help small and midsized companies export as easily as big companies do,” says Xiao Feng, vice general manager of OneTouch. “Alibaba unites small businesses online to increase their bargaining power with suppliers. For example, there’s a big difference in the price paid by a company that often ships 100 containers of products compared with a company that usually only ships one container.”

“Besides, we set up credit system for the companies based on their historical trade records and connect it with seven major commercial banks to offer better financing services. Our clients enjoy lower interest on their loans, even though Alibaba adds 10% profit on it,” he says.

Sign up for a free subscription to B2BecNews, a weekly newsletter that covers technology and business trends in the growing B2B e-commerce industry. B2BecNews is published by Vertical Web Media LLC, which also publishes the monthly business magazine Internet Retailer. Follow Frank Tong on Twitter @FrankTongIR